You are on page 1of 2

Mauricio Duran Professor Stefanidis Macroeconomics May 3, 2011 Final Essay The three pillars of macroeconomics are output,

money and expectations. In this essay these three tools will be use to explain the current economic situation, the right mix of monetary and fiscal policy, and the appropriate structure of an investment portfolio. Of the three tools under discussion the most important is output. That is because, total output is a true measure of the size of an economy i.e. all a country has is the total output it produces in a year. Real gross domestic product (GDP) is the broadest measure of national income available, adjusted for changes in the value of money. The advanced release of Q1/ 11 GDP revealed real economic growth of 1.8%, down from 3.1% in Q4/10. This is a real problem, especially since expectations were much greater as a result of the passage of the fiscal package last December. However, household spending on durable goods rose 10.6%, indication that consumers are starting to inject more money into the economy, which is a positive sign. The second pillar of macroeconomics is money, in our case the U.S. dollar (USD). The U.S. government has control of the dollar, which allows it to essentially set interest rates, especially short-term interest rates. This ability is know as the monetary policy i.e. by increasing or decreasing the money supply central bankers can try to control inflation and moderate the business cycle. At the present time, the matter of monetary policy is very sensitive. The wrong decision can send the U.S. economy into a second recession in three years; meanwhile we are still trying to recover from the first. If the U.S. government and the U.S. economy continue in their current direction, it is likely that real consumer spending and real GDP will continue its recovery (rise). On the other hand, if the Federal Reserve decides to take action in an attempt to halt the rising tide of inflation it will most likely cause a financial crisis leading to a even more sever recession then the first one. The current economic problem the U.S. is facing right now is that the U.S. has not fixed the major economic problems that cause the downturn in 2007-08. Instead of reducing debt, the U.S. government has just pill up more debt. The fiscal package, which was approved last December, was intended to stimulate economic growth. Unfortunately, the real GDP did not grow to expected levels, as evidenced by the Q1/11. Instead, the growing debt is driving the U.S. credit score down making it more expensive to borrow money, and the increase money supply is destroying the value of the USD, making it more expensive to pay back loans. Sooner or later the U.S. citizen will have to pay for all this debt that the government has created. The longer the government waits to take action the harder it will be to pay back the debt. For this reason I think the best monetary and fiscal policy would be one that addresses the debt problem i.e. decrease the money supply, decrease government spending, and increase taxes. Although, in the short run this may create another recession, in the long term it will restore the strength of the dollar and security in the economy. The government should do this in the smoothest way possible to allow American citizens to

adjust to the lower standards of living. In addition, I believe the USD should go back to being backed by gold so this problem does not repeat itself in the future. Expectations are the third pillar of microeconomics. Expectations are particularly important because even if expectations of the future are wrong, people will still act today on what they expect will happen tomorrow i.e. people adjust their portfolios based on expectations. At the present moment the future of U.S. economy is very uncertain, however what is certain is that sooner or later someone will have to pay for all the debt acquired, the question is when? Because of this uncertainty, people should invest in a defensive manner to protect their assets e.g. investing in noncyclical instead of cyclical stocks. What is certain is that interest rates and inflation will rise from the current levels. For this reason I would also suggest investing in commodities, especially silver and gold, and government issued bonds. Lastly, as far as cash is concerned I would highly recommend not holding on to it. Tough essay! very informative and slightly argumentative ; well written. I couldnt find any errors, maybe you used i.e too many times, but I might be wrong, other than that, I highlight that one sentence because it sounded awkward to me. However, I couldnt come up with any suggestions. I must say I agree with you and your points sound a lot like some articles I ve read. I hope you dont have to cite because you do have some facts that need in text-citations. Other then that, thanks for sharing, it was an interesting read.